B4/C3: The fertility of land, continued. The tendency to diminishing return

This chapter, with 20 pages, is the longest so far in the book, and I am in a bit of a hurry, so my brief comments here might not do it justice. (OTOH, it seems these posts are for my enjoyment only, so no blood no foul, right?)

§1. “An increase in the capital and labour applied in the cultivation of land causes in general a less than proportionate increase in the amount of produce raised, unless it happens to coincide with an improvement in the arts of agriculture” (p 125). From this, Marshall states that farmers initially have increasing returns to the application of labor and capital to land, but that these returns inevitably diminish as production reaches a maximum, after which point additional capital and labor investments return less value (in output) than they cost. The only way to increase production, then, is to cultivate more land (on the extensive margin), which is fine until all the “free” land is gone, which was already true in the times of the Old Testament. The only way left to increase production on the intensive margin is, therefore, to have better technology (e.g., seeds, fertilizer, machines, etc.).

§2. Marshall goes into (tedious) detail in explaining diminishing and marginal returns, using footnotes and diagrams that were — at the time of his book — revolutionary in setting “rigorous” standards. These concepts are well-known today. He also makes the interesting distinction between returns from land itself, man’s effort to improve the land, and access from the land to markets, etc. This last bit uncovers an interesting connection between private property (and effort) and collective goods such as roads and markets that help everyone.

§3. Returns to effort and capital can rise and fall over different types of land and in different stages of intensity. Some land becomes more valuable with a little effort; other land needs much more effort. In some cases, effort will “uncover” an opportunity that awards later effort. This process takes time and experimentation. Farmers know this; economists would be wise to remember it — but they have not, since today’s theory assumes returns diminish continuously, always and everywhere, once they get started.

§4. Different lands tend to converge in their values as farmers adjust the mix of crops and inputs in response to market prices.

§5. Marshal defends Ricardo’s assumption (that settlers in a new region cultivate the most fertile lands first, then move to less fertile lands) as the result of “unclear writing rather than unclear thought” since initial cultivation decisions will change over time with new knowledge — and especially when agricultural products move from own consumption to being traded in markets. In a footnote to this passage, Marshall makes a note on productivity in the tropics that applies to our climate-changing world:

But much of the apparent attractiveness of tropical countries is delusive: they would give a very rich return to hard work: but hard work in them is impossible at present, though some change in this respect may be made by the progress of medical and especially bacteriological science. A cool refreshing breeze is as much a necessary of vigorous life as food itself. Land that offers plenty of food but whose climate destroys energy, is not more productive of the raw material of human wellbeing, than land that supplies less food but has an invigorating climate. (p 137)

§6. Marshall’s description of “the commons” mentioned above (§2) is also worth quoting:

But in fact every farmer is aided by the presence of neighbours whether agriculturists or townspeople. Even if most of them are engaged like himself in agriculture, they gradually supply him with good roads, and other means of communication: they give him a market in which he can buy at reasonable terms what he wants, necessaries, comforts and luxuries for himself and his family, and all the various requisites for his farm work: they surround him with knowledge: medical aid, instruction and amusement are brought to his door; his mind becomes wider, and his efficiency is in many ways increased. And if the neighbouring market town expands into a large industrial centre, his gain is much greater. All his produce is worth more; some things which he used to throw away fetch a good price.

§7. Marshall opines on the differences between diminishing returns to land,  fisheries and mines. In the cases of land and fisheries, returns can be continuous due to the renewable nature of the yields (crops and fish, respectively). He then gives a nice example of early 20th century thinking over fisheries:

As to the sea, opinions differ. Its volume is vast, and fish are very prolific; and some think that a practically unlimited supply can be drawn from the sea by man without appreciably affecting the numbers that remain there; or in other words, that the law of diminishing return scarcely applies at all to sea-fisheries: while others think that experience shows a falling-off in the productiveness of those fisheries that have been vigorously worked, especially by steam trawlers. The question is important, for the future population of the world will be appreciably affected as regards both quantity and quality, by the available supply of fish. (p138)

The population of the world today should be quite concerned: one-third of fisheries are over-fished.

Marshall’s comments on mining for non-renewable resources are also interesting. He says that mining can indeed witness decreasing returns, but not necessarily before the mine has given its entire yield.

§8. Marshall ends the chapter with a long, tedious note in which he makes two useful observations. First, there’s a difference between an individual changing their mix of land, labor and capital to maximize the productivity of each input and a nation changing that mix, since some inputs are fixed in aggregate, based on different times and places, with land being the most common. Following on this, he clarifies that Americans are not having the same discussion over diminishing returns as people in the Old World, since American lands were valued according to their market access rather than their fertility.

Interesting stuff

Corona

  1. A post-pandemic world will have more government, be less globalized, and rethink its market economies
  2. A list of the economic and political areas C19 will impact (improve?)
  3. The “real” death rate from C19 in NL (measured via “excess deaths”) is 9,000 — 32% higher than the official C19 death count.
  4. Good advice on how to keep yourself sane in lockdown
  5. Covid as the “shift” from US to Chinese dominance
  6. Universities shouldn’t re-open but adapt
  7. This cartoon says it all

Non-Corona

  1. Why are so many leaders incompetent — and male? 
  2. A useful summary of the good points (somewhat buried by its poor format) in “Planet of the Humans.” I agree with all 5 — and have for years 😉
  3. Logs, which I kinda understand, are pretty cool
  4. Episode 1,000 of Planet Money: behind the green curtains

H/Ts to IH, VZ

B4/C2: The fertility of land

§1. “Land” is defined as an input to production which is, contra capital, not made by man. Thus, dirt, but also trees, fish, reefs, the air. Humans do not make these elements of “land” but they are important as an input, and — in the case of dirt — also as the source of spacial rights that have their own value, in position and security.

§2. Agricultural soil comes with a range of characteristics (sandy, clay, organic, etc), which man can affect by tillage or adding (artificial) manure.

§3. Soil has been affected by human action for ages, but we should not forget the value of the heat, water and air that comes with some locations but not others. Those characteristics explain the “rents” that vary by plot.

§4. The relative contributions of land and labor, in terms of dividing the rents, varies with crops. Wood-bearing trees require much less labor than fruit-baring trees, or vegetables. Once the land contribution is made, labor and capital will be used until diminishing marginal returns advise a cut off, in terms of maximal output or value.

 

Interesting stuff

Corona-related

  1. Read this excellent summary of how much C19 risk you face in confined spaces, outdoors, etc.
  2. Real asset values will fall when we factor in the loss of buying power
  3. “Inevitable” urbanization isn’t.
  4. This article on the death of small businesses did not change my mind, because it’s wrong. Yes, many businesses will fail, but many more will rise in their place (“creative destruction”) IF governments allow free competition instead of subsidizing friends. Let’s see.
  5. Students are asking if they are getting value for their money from universities as courses go online. Good question.
  6. A good summary of what C19 has taught us about ourselves
  7. Mapping the virus  — including its genetic mutations
  8. Good podcasts: The environment recovers from our assault, the economy slows (and that’s good), and the economy crashes (and that’s bad).

Non-Corona

  1. Robots are not really a threat
  2. Advice for new grads, from old grads TED speakers
  3. TU/Eindhoven’s campaign to hire only female professors (to correct a gender imbalance) is going well: 35 are hired (out of a target of 150?)

H/Ts to NN and RP

The bright side of the black market

Menno writes*

The black market is not as bad as many policymakers believe. It provides a lot of otherwise unemployed individuals with labor and income. Formalization of the economy is vital since it allows for more development through taxation, which is especially the case in countries with a huge informal market such as Bangladesh. However, this does not mean the informal economy is only bad news.

Informal businesses collectively employ fully half the world’s workers. Often, the black market is considered to be harmful to a country’s development. However, small, illegal, off-the-books businesses collectively account for trillions of dollars in commerce. These enterprises are essential for entrepreneurialism, innovation, and self-reliance. Furthermore, black markets have grown during the international recession, adding jobs, increasing sales, and improving the lives of hundreds of millions. Thus, black markets offer more than meets the eye.

The reason the informal market troubles a lot of policymakers is because it is associated with low productivity and poverty. It is generally believed that the primary solution to a large informal economy is economic growth. More formal employment leads to more taxation, which can then lead to better education, which can help people transfer from informal to formal labor. The figure below shows that an increase in GDP is associated with a lower share of informal employment. However, this trend does not occur in all countries.

In Bangladesh, specifically, the informal economy has grown to a vast size. It currently accounts for 89% of the total labor force, constituting 64% of the country’s GDP. The informal market has grown despite a steady rate of economic growth for the last three decades. The increase of the informal market is driven by the large population, the dominance of young age groups, and an increase in female participation in the labor market. Furthermore, Bangladesh’s economy is witnessing a significant growth of service sector jobs ahead of manufacturing jobs, forcing a lot of people to work in the black market.

Institutional restrictions, harassment, illegal extractions by local touts, and general hostility in society significantly limit the full potential of the black market in Bangladesh. Furthermore, informal businesses enjoy less institutional support than their formal competition. Often, informal employees work under challenging conditions, with more harassment and less job security.

Since economic growth decreased the size of the informal economy, Bangladesh requires a different approach. First of all, I believe, since the informal economy plays such a significant role, Bangladesh should focus on improving productivity within the sector instead of threatening it. Policymakers should remember that, even though the formal economy is more efficient, the informal economy still provides a large number of jobs and contributes to economic growth. Thus, instead of attempting to lower the size of the informal market through institutional restrictions, I believe it should be incorporated into the formal economy by providing job security and benefits.

Second, policymakers need to shift from promoting service sector jobs to providing industrial employment and investing in education. Often people are informally employed, not because they want to but because they have to. By providing these individuals with jobs and education, they could transfer into the formal market, where there can work under better conditions for a better wage.

Bottom Line: Productive work is helpful, formal or not.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Not-so-special economic zones

Sam writes*

Ever wondered where that iPhone of yours came from? Who put it together? And how are so many can be made each year? For years we have used a neat trick in order to keep up with this type of demand, most particularly in electronic devices.

Special Economic Zones (SEZs) are that neat trick. They offer “tax efficiency” and loose regulations to attract industry that will export to the world. China loves them — establishing over 60 SEZs since the 80s — and that’s how you get the iPhones you know and love.

So that answers the “where” question, but what about the “who” and the “how”? As it turns out, Apple workers in Chinese SEZs have some of the worst working conditions imaginable. Minimum wages are barely higher than the living wage [pdf], working shifts can exceed 16 hours (oh and there’s no overtime pay), and conditions require workers to meet quotas as they attach tiny wires and chips all day. The stress has led to alcohol abuse, divorce rates are 3 times the national average, and suicides so regular that factories have have councilors on site.

How are companies allowed to do this? Article 22 of the National Chinese Labor Act states that workers have the right to fair pay and healthy working conditions but not in SEZs (remember those loose regulations). Since trade unions are not permitted in China, workers are not likely to see improvements in their conditions.

Photo Courtesy of Steve Jurvetson, CC-BY-2.0 [pdf]
Apple’s relationship with China was worth over $43 billion in 2019, with 217 million iPhones produced (and some sold) in the country. SEZs allow rich companies to profit from cheap labor in exchange some technology transfer. SEZs are popular everywhere, but especially in rapidly developing countries such as China and India that have abundant labor. In places without a labor glut, like in the United Arab Emirates, labor is imported [pdf] to work in their “Free Economic Zones”.

Bottom line: Global competitiveness means firms need fast, efficient, accessible places to produce their products. Countries with SEZs benefit from growing industries, FDI, and new technologies, but is this the best route to development? Worried that workers are losing? Don’t. Your nice new iPhone created jobs, even if they are poorly paid.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Corruption and EU Cohesion Policy

Pieter writes*

Roughly a third of the European Union’s budget is spent on Cohesion Policy. Through this, the EU invests in sub-national regions with the aim of “converging” their quality of life upwards, to EU averages. This is done by fostering economic growth, business competitiveness, sustainable development, and supporting job creation in the poorer regions of Europe. Three different types of funds are used: First, the Cohesion Fund is used to ameliorate the economic and social situations of the regions of Member States with a GNI per capita that falls below the threshold of 90% of the EU’s average. Second, the European Regional Development Fund (ERDF) aims to induce competitiveness and create regional jobs. Third, the EU invests in educational opportunities and combats unemployment using the European Social Fund (ESF).

Over the past decades, many studies have analysed how effective Cohesion Policy has been in converging the regional economies of the EU. Numerous studies have found that transfers from the different Cohesion Policy funds effectively stimulated economic growth in underperforming regions (Becker et al., 2012; Becker et al., 2018; Medeiros, 2013). However, most of the studies analysing this subject mention a variety of drawbacks. First, studies found that the EU was not effective in all goals that it claims to pursue with Cohesion Policy. To exemplify, research has suggested that it has not been very successful in reducing unemployment (Becker et al., 2010). Second, although immediate results are promising, progress often stops or reverses when funding stops (Becker et al., 2018). Third, Cohesion Policy effectiveness depends on institutional quality, which is largely outside the EU’s sphere of influence (Marzinotto, 2012 [pdf]).

Although institutional quality can be approached from several perspectives, a crucial component is the level of corruption within the institutional structures of Member States receiving transfers. Corruption reduces Cohesion Policy effectiveness through two (interacting) mechanisms. First, in a corrupt administration much of the resources made available will be allocated to ‘rent-seeking’ activities, as opposed to ‘productive’ activities; this will thus inhibit the extent to which the goals of Cohesion Policy can effectively be pursued (Ederveen, 2003). Second, once the European Commission establishes that funds are used in a corrupt manner, it can decide to withhold further funds. To exemplify, Bulgaria was entitled to roughly a billion euros from the European Regional Development Fund in the period from 2007 to 2009. However, because the Commission was unsatisfied with responses to fraud and corruption cases, so Bulgarian regions received only 30% of the initially allocated funds (Pop, 2009).

Analysing the relationship from a different perspective, it can be theorised that there is also a causal mechanism between Cohesion Policy and corruption, originating from Cohesion Policy itself. In other words, Cohesion Policy can induce corruption in the regions that it aims to support. Fazekas (2013 [pdf]) analysed Central and Eastern Europe and showed that although the EU provides extra resources, often it fails to balance this out by putting sufficient controls for corruption in place, leading to increased rent-extracting behaviour.

Bottom line: Although the European Union’s Cohesion Policy has helped helped sub-national regions grow, it may not work if corruption diverts funds and may exacerbate corruption if implemented without controls.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Indonesia’s fossil fuel subsidies

Natalie writes*

Until recently, subsidised energy in Indonesia was a public service obligation, provided to all citizens. Ever since becoming independent in 1949, the fossil fuel subsidies are a prominent aspect of Indonesia’s economy, and are intertwined with the oil industry. Initially, they were created as a means to redistribute wealth earned from oil revenues, by subsidising on the consumer end to reduce poverty. Yet, poor targeting of the policy has brought along issues, and no poverty alleviation [pdf].

The budgets for subsidies have increased throughout the past decades, pressuring the fiscal capacity of the Indonesian government. Between 2008-2014, subsidised petroleum products, 3-kg LPG, and electricity accounted for 20% of the country’s central government budget [pdf]. This led to underinvestment in essential public services, including infrastructure and education. Additionally, the characteristic of being a ‘blanket’ subsidy for all citizens made that mostly higher income Indonesians who owned private vehicles would enjoy the subsidy.

A worker at a state-owned Pertamina petrol station holds money as a motorcycle is filled with subsidised fuel in Jakarta October 31, 2014.

Moreover, apart from climate change as a negative externality, another associated with the subsidy is the black market in fuel – cheap, subsidised oil is sold to ineligible consumers or businesses at below market prices. Another issue is the ‘oil and gas mafia’, referring to the corrupt elites running the fossil fuel industry. They have allegedly cost the country over $4.2 billion in revenues every year through embezzlement of Ministry of Energy funds, extortion, smuggling, and tax fraud.

Nevertheless, pursuits of reforms throughout the past decades have faced pushback from consumers and stakeholders. Citizens considered subsidies their right, and perceived price adjustments as a high risk for inflation, consequently causing protests and disorder. Simultaneously, there have been vested interests from the ones benefitting from subsidised fuel; the Indonesian oil-trading lobby, state-owned oil company Pertamina, and vehicle manufacturers and distributors, intensely lobbied against attempts at reformation.

Despite the political favourability of the policy, there have been two successful reforms to phase out the subsidies: between 2005 and 2007, and between 2013 and 2015. These were to curtail negative externalities, and eventually shift fossil fuel consumption to renewable energy. The success was driven by macro-economic fluctuations, primarily the external shocks posed by the 2008 Global Financial Crisis and depreciation of the Indonesian rupiah in 2014, creating both urgency and societal leverage. As a result, less than 1% of GDP was spent on fossil fuel subsidies in 2016, as opposed to about 3% of GDP in 2014. Although the fossil fuel subsidy apparatus has not been abandoned entirely, Indonesia is on the right path to cost-reflective fuel prices.

Bottom line: Indonesia’s fossil fuel subsidies were meant to aid the country’s development, but induced inter alia fiscal deficits, corruption, and black markets. After several failed attempts of reform, external shocks opened up opportunities for successful policy change.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Is corona lighting a fire?

Fay writes*

Currently, 17 percent of the Dutch workforce suffers from a burnout. Symptoms vary from irritability and disrupted sleep patterns to emotional lability. However, the central characteristic of a burnout is the experience of physical, emotional and mental exhaustion [pdf].

High work pressure with little autonomy and support from colleagues is found to increase the risk of burnouts, whereas being socially connected with family, friends and colleagues decreases these chances [pdf].

Burnouts are a relatively big problem in the Netherlands in comparison to other European countries. This is caused by our social structure. Under pressure from the neo-liberal market, we have traded social cohesion for flexibility, the productivity that results from it, and illusive freedom. Where long-term contracts and labor unions were the norm, we now all compete independently for the next better job. We are trapped in a system in which we tell ourselves to work harder and to be perpetually available because if we won’t, the next freelancer will.

Initially, the current corona crisis, forcing us to work from home, was thought to be the necessary brake society had been reluctant to pull. At first, when the lockdown was just announced, professionals mainly warned of increasing cases of burnout caused by the stirring global pandemic. Juggling changing work patterns with childcare was expected to lead to increased pressure, and hence, burnout symptoms. Yet currently, the “break given by the brake” seems to positively affect our work-related burnout symptoms. Even though many workers risk losing jobs or have to work harder than ever before, the lucky ones who still receive a pay check, start to express the relief accompanying empty calendars and the simplicity of the current working days. Because of the crisis, we are learning how easy it is to cancel commitments. People suffering from burnouts often struggle to say no, as everything is perceived to be important. The current crisis teaches us that, yes, we can cancel appointments. Additionally, the newly freed up time in our calendars allows us to think about what is important, and why we work in the first place. We long believed that if we worked even harder we could conquer the world, but does that belief still hold true today? “By changing how we work, we change how we relate to each other and ourselves”.

Moreover, since we are all in this together, the pandemic increases a perception of social cohesion. Naturally, a global pandemic introduces stress sources other than work, the seriousness of which should not be tempered. However, if we maintain higher levels of rest and social cohesion once normal work resumes, then some cases of burnout could decrease. Perhaps our hopeful future will have more people burning brightly instead of burning out.

Bottom Line: Dutch social structure had focused on productivity, which led to more burnouts than seen in other European countries. The current corona crisis, although catastrophic in many aspects, decreased work-related stress for salaried employees  working from home. Simplicity, empty agendas, increased social cohesion and a new look at careerism is expected to decrease burnout rates. Perhaps corona gave Dutch society the break it needed.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

The cottage cheese rebellion

Lihi writes*

In the summer of 2011, three months after a Facebook page called “cottage protest” was created, nearly 500,000 people walked the streets of Israel screaming “the people want social justice”. It was the largest protest in the history of Israel, nothing as such has happen since. It was accompanied by three months of social havoc. Nearly 100 00 people built tents in their city’s parks and streets living there for two months, and doctors went on a strike. For three months the entire Israeli population, across cleavages and age groups, asked for more affordable-housing, lower commodities prices, and better wages. Why did it happen? Did it work? I am studying this riddle of the Israeli-economy and will explain one angle of it here.

Liberalizing cottage cheese
Let’s look at the context of the the cottage rebellion. Israel was founded on heavily social-democrat principles (1948), and in 2003 it underwent a critical juncture. In the midst of the second intifada, the government was drowning in debt and a new minister of treasury took the reins reign: Benjamin Netanyahu. An Ivy-League economics graduate and believer in neo-classical theory, he privatized major government corporations such as Zim, refineries, Bezeq (communication), Discount Bank, and ELAL (national airline).

Furthermore, he cut state subsidies for children, people with disabilities, unemployed, and public employees by at least 4%. Finally, he changed the taxing regime, lowered market regulation, and privatized the employment bureau to placement companies. In two years, unemployment went from 13.3% to 7% and continued to decline until stabilizing at 4%. Government debt fell, real GDP doubled by 2017, and in 2010 Israel officially joined the OECD as one of its youngest members. Significantly, the hi-tech industry grew world famous, with Beer Sheva hosting the largest cyber security centre in the world. Jordan has a similar population but its GDP of $42 billion is far smaller than Israel’s $370 billion. With this kind of success, why fight over cottage cheese?

Cottage cheese and solidarity
Cottage cheese is an Israeli symbol, even when the country was young and poor, people had a coupon for cottage cheese – it’s in every family’s refrigerator, rich or poor. Netanyahu’s free-market reforms left many below the (relative) poverty line. With less government regulation on employment, many people became contractors without rights, and their income didn’t increase nearly as fast as living costs [pdf]. Worse, the number of employed people in poverty line is still growing.

With reforms aimed at minimizing market intervention, monopolies emerged; in 2011 Tnuva (dairy products) controlled over 53% of the dairy market, prices increased accordingly [pdf]. The OECD report for 2011 and 2013 stressed the lack of competition in the economy, and declining education scores. Further, it discussed the fact the housing market demands more supervision and increased supply. Due to political incentives and the specific characteristics of minorities, only 50% of the Israeli population pays taxes, and the orthodox community doesn’t participate in mandatory service. Finally, Israel is in the bottom 10 OECD countries in terms of investment in healthcare.

Bottom Line: Eight years after the reforms of 2003, adults realized that their respected jobs, national service, tax paying, education did not give them enough money left over to buy cottage cheese. One person opened a Facebook page, and so started the cottage spring. The protest ended with a special governmental inquisitor committee, it published recommendations; policies were created, but never really applied. The momentum was lost, but struggle continues.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).